Oil Speculation and Other Conspiracy Theories

The U.S. government is a favorite target among spinners of conspiracy theories. From the Kennedy assasination to the Apollo Moon landing, the government has allegedly been at the heart of dark plots to deceive the public.

Washington, however, can spin its own conspiracy theories. Case in point, Tuesday’s announcement by the Commodity Futures Trading Commission that it will explore restrictions on speculators who are supposedly increasing the price of oil.

Blaming speculators, of course, is a time-honored tradition for politicians. The word itself goes back to Roman times. And they never have been popular. As far back as 1918, Lenin assured the Petrograd Soviet that “speculators who are caught…shall be…shot on the spot”.

Speculators today, while not facing firing squads, aren’t much more popular. The charge facing them now: that they artificially increased demand for oil, thus causing the recent run up in gas prices.

If the charge sounds familiar, it should be. The same claims were made last summer, and largely found to be unfounded. In fact, as Heritage’s Ben Lieberman has pointed out, there have been charges of market mainipulation just about every time gas prices have gone up, followed by extensive FTC investigations, which inevitably find the charges to be unfounded.

Could this time be different? While not impossible, it’s doubtful, especially given the vast size of the oil market. There’s also a shaky link between futures market trading (which doesn’t take any any actual oil out of the marketplace) and spot market prices for oil. (A study released this week by the Federal Reserve, moroever, finds no correlation between speculation and the price of any commodity). With an economy on the mend, its much more likely that oil prices have been rising due to expected increases in demand, not manipulation.

Still, is there any harm in limiting speculation, just in case? The answer is yes, there is harm. Despite all their ancient vilification, speculators play an essential role in the marketplace. As Heritage’s J.D. Foster put it last year: “Speculators accept risk that somebody else doesn’t want. And speculators are rewarded for accepting risk if they prove right, and they lose money if they get it wrong.”

For instance, airlines have enormous demand for fuel, and often hedge against a rise in the price of oil.

For this reason, few argue for a complete ban on speculation, instead proposing that only “bad” speculation be targeted, limiting only those for whom a price hedge is not inherent to their business. But who’s to say what risks are inherent or not? Moreover, those without an inherent risk to hedge also play an essential role, by buying risk from and to others. As Foster pointed out, “[w]ithout the speculator on the other side of the transaction, the airline can’t hedge its risk.”

Regulators do markets — or consumers — no favors by spinning conspiracy theories around speculators. If policymakers are really concerned about high energy prices, they should look instead at their own role in limiting development and supply. While it may not grab headlines, the government’s own policies, far more than any dark speculative conspiracy, are at the root of the problem.

Join The Discussion

Roman times? 1918 Petrograd Soviet? Those were the days when information was scarce. Today we have real time news feeds streamed to our mobile phones and computers.

The public is well aware of actions speculators have in this market.

We read news articles about 4 men in Nigeria and their failed attack on an oil platform, oil rises. We read and watch a hurricane form in the Atlantic, never making landfall, oil rises.

We read, watch, and hear these wild swings and are now starting to see that the only people who oppose such regulation are the ones that benefit from such actions thus the cause of the initial problem.

We can explain to our youth the aspects of supply and demand but they can seen how it does not fit current market fundamentals and to think it is not speculation or manipulation idiotic.

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